2010 (4) TMI 967 - SC - Companies Law

Whether an arbitration clause found in a document (agreement) between two parties could be considered as a binding arbitration agreement on a person who is not a signatory to the agreement? Whether a company could be said to be a party to a contract containing an arbitration agreement even though it did not sign the agreement containing an arbitration clause with reference to its subsequent conduct? Held that - Appeal allowed. Set aside the order of the High Court appointing an Arbitrator in regard to the claims of Wescare against Indowind and dismiss the application under section 11(6) of the Act filed by Wescare in so far as Indowind is concerned. The appointment of Arbitrator in so far as Subuthi is concerned is not disturbed. It is however open to Subuthi to raise all contentions including the contention relating to absence of arbitral dispute before the Arbitrator.

Summary

Issues Involved:
1. Whether an arbitration clause in a document between two parties can bind a non-signatory.
2. Whether a company can be considered a party to a contract containing an arbitration clause based on its subsequent conduct.

Issue-wise Detailed Analysis:

1. Binding Nature of Arbitration Clause on Non-Signatory:

The Supreme Court examined whether an arbitration clause in an agreement between two parties (Wescare and Subuthi) could bind Indowind, a non-signatory. Section 7 of the Arbitration and Conciliation Act, 1996, defines an arbitration agreement and requires it to be in writing. The court noted that an arbitration agreement must be between the parties to the dispute and applicable to the dispute. The agreement dated 24.2.2006 was signed by Wescare and Subuthi but not by Indowind. The court concluded that Indowind, not being a signatory, could not be considered a party to the arbitration agreement under Section 7(4)(a), (b), (c), or (5) of the Act. The absence of any document signed by Indowind or any exchange of correspondence indicating an arbitration agreement led to the conclusion that Indowind was not bound by the arbitration clause.

2. Party to Contract Based on Subsequent Conduct:

The court analyzed whether Indowind could be deemed a party to the agreement based on its subsequent conduct. Wescare argued that Subuthi, as Indowind's promoter, entered into the agreement on behalf of Indowind, and Indowind's actions indicated it acted in terms of the agreement. However, the court emphasized that each company is a separate legal entity, and common directors or shareholders do not merge their identities. The agreement required express approval from the Board of Directors of Indowind, which was not obtained. The court found no evidence that Indowind ratified, approved, or acted upon the agreement dated 24.2.2006. The transactions between Wescare and Indowind, such as the sale of WEGs, did not reference the agreement, indicating they were independent transactions.

Conclusion:

The Supreme Court held that Indowind was not a party to the arbitration agreement as it did not sign or ratify the agreement dated 24.2.2006. The court set aside the High Court's order appointing an arbitrator for the claims against Indowind and dismissed the application under Section 11(6) of the Act concerning Indowind. The appointment of the arbitrator concerning Subuthi was not disturbed, allowing Subuthi to raise all contentions before the arbitrator.